Schansberg: The Minimum Wage Is Minimally Helpful

August 15, 2013

by Eric Schansberg, Ph.D.

Later this month, we will observe the 50th anniversary of the “March on Washington for Jobs and Freedom.” Dr. Terri Jett recently penned an op-ed for the Indianapolis Star about the protesters’ demands and their contemporary relevance. In particular, she emphasized a significant increase in the minimum wage (to $10.10 per hour) as “a moral imperative” that would be beneficial to less-skilled workers and the economy as a whole.

Dr. Jett encouraged her readers to support legislation proposed by Sen. Tom Harkin (D-IA) and Rep. George Miller (D-CA). Their bill would “index” the minimum wage as well and provide an arbitrary increase in the minimum wage for restaurant servers. Both provisions are reasonable enough — if one is going to have a minimum wage. But the minimum wage itself is greatly overrated and vastly inferior to other policies that accomplish the same goals without collateral damage.

Let’s start with the helpful ideas in the legislation. First, “indexing” means to adjust something for the impact of inflation. For example, the tax code is indexed so that taxpayers don’t drift into higher income-tax brackets simply through the higher cost of living induced by the federal government through inflation. Social Security is also indexed; payments to the elderly are adjusted for higher average costs of living. Likewise, the minimum wage should be indexed.

Another benefit of this reform is that it would eliminate the need to revisit this tired issue every few years. We don’t argue over giving more money to grandma every few years. There’s no good reason to sporadically debate the minimum wage either.

Second, the minimum wage is not currently applied to all labor markets. Restaurant servers don’t earn the minimum but they receive tip income. Other exemptions are far more arbitrary, ranging from babysitters to farmers, from wreath-makers to newspaper employees, from the disabled to the seasonally employed. But if the minimum wage is good policy — for workers and for society — why are there any exceptions at all? In this, the Harkin-Miller proposal lacks coherency or courage.

All that said, the minimum wage is not good policy. Let’s start with the most obvious point: By increasing the cost of hiring less-skilled workers, the policy would help those who keep their jobs but harm those whose skills would not be rented at the higher, artificial, arbitrary wage floor. (For example, the unemployment rate was 11 percent in July for those with less than a high school education.) Why is it wise or compassionate to help some less-skilled workers by punishing others in the same, vulnerable category?

This can’t be good for the economy as a whole. If it were, we could simply legislate our way to economic growth and prosperity by increasing the minimum wage to $50 per hour. Again, the policy prescription lacks coherence or courage.

Ironically, given Dr. Jett’s connection of the policy to the goals of the March, a higher minimum wage increases the likelihood of discriminatory outcomes. The policy disproportionately impacts some minority groups, since they are disproportionately among the unskilled. And by increasing the surplus of workers (unemployment), it lowers the cost of engaging in discrimination. If I’m a bigot, it’s comforting to know that there’s a line of workers from whom I can choose to indulge my odd and unfortunate preferences. (For example, the black teen unemployment rate was 42 percent in July; for white teens, it was 20 percent.)

Finally, the minimum wage is poorly targeted. It increases wages for all minimum-wage workers, not just those trying to raise a family on a “living wage.” As such, it points to better policy alternatives. For example, Indiana imposes the highest state-income taxes on households at the poverty line. State legislators, concerned about the working poor, should eliminate all taxation on income earned by those in households below the poverty line.

Federal payroll (FICA) taxes cause far more damage. They cost the working poor 15.3 percent of every dollar earned — for those at the poverty line, more than $3,000 per year. The beauty of these policy reforms is that they do not impose a cost on those we’re trying to help.

The “moral imperative” with public policy begins with good policy analysis and well-targeted policies that maximize benefits and minimize costs, particularly for the vulnerable in our society. As such, the minimum wage is a poor policy for trying to help the poor.

D. Eric Schansberg is professor of economics at Indiana University Southeast in New Albany, an adjunct scholar for the Indiana Policy Review, and the author of “Turn Neither to the Right nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy.”

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